Last week saw significant developments in three areas that might seem relatively unconnected but which are likely to become intimately connected in the future – retail financial advice, long-term mortgage arrears and Regtech.
The link below - to an FT article about the growth of robo advice services – recalls the period in 2011 when retail banks, almost en masse, withdrew from offering retail investment advice. This was ahead of the introduction of the Retail Distribution Review (RDR) reforms, which had been, laboriously, designed to raise the standard (and consequently the cost) of providing advice to retail consumers.
Regulators’ fears at the time included dismay that the banks’ withdrawal left a significant gap. But there was also a sense that the quality of advice did need to rise, particularly (as is the case with the great majority of households) where the amount of money available to invest is small.
As the article makes clear, these considerations haven’t gone away. And it’s hard not to conclude that regulation of these markets will need to become much more effective, without adding to providers’ costs, if retail investment is to thrive.
Moving on, the Mortgage Market Review (RDR), which originated a few years after RDR but proved almost as long in the making and shares several of its characteristics (including increasing in provider costs), has always been hindered by the overhang of the financial crisis. In essence, a significant proportion of current mortgages, originating before the crisis, would not have been offered if MMR had been in place at the time.
Last week, the FCA published its latest findings on how firms are managing long-term arrears, and specifically their use of forbearance. These were generally positive but, almost inevitably, identified some inconsistencies. Given the size of commitment a mortgage is for almost all households, each of these inconsistencies is potentially non-trivial.
And so to Regtech and last week’s RegTech Rising conference, where, to my ears, the emphasis had definitely shifted and matured from previous Regtech conferences I’ve attended. Reducing the cost of compliance itself was, rightly, still a main driver. But it was joined more explicitly than I’ve regularly heard before by the ambition to solve real regulatory and societal problems – notably, but not exclusively, financial crime/money laundering. Meanwhile, Data Ethics is emerging as a core issue, and there was also more open discussion about the silo-type problems within firms that inhibit the more rapid and effective adoption of Regtech solutions.
Retail investment advice and mortgages are just two of the areas where Regtech could potentially make a massive difference, eliminating the great majority of mistakes firms make, enabling firms to operate more effectively across internal silos, and giving regulators justified confidence that the industry is treating customers fairly.
Regtech solutions that are going to add genuine value over the long term will need to simultaneously meet two tests. They will need to both: reduce the cost of regulation for firms; and, by enabling both firms and regulators to minimize inconsistencies and errors, improve the quality of markets and make the regulatory environment much safer for consumers.
Whether or not robo services constitute advice has been a contentious topic. The Financial Conduct Authority stipulates that full financial advice must be truly personalised, involving an assessment of customers’ financial position and goals. But in May the Financial Conduct Authority criticised a host of online wealth managers for falling short of that mark.